Overview of Current Economic Conditions in Mexico
Banqueros de México (Banxico) is expected to lower its benchmark interest rate by 50 basis points, placing it at 8.5%, according to market expectations. This move is likely to be communicated in their June statement, with a similar reduction anticipated.
By the end of June, it is projected that the interest rate will be around 8%. Market surveys suggest that the year-end rate could range between 7.50% and 7.75%. However, moderating expectations hint that the rate might not fall further due to certain factors.
Inflation Trends and Their Impact
One significant factor is the recent uptick in inflation rates. The general annual inflation rate has risen from a minimum of 3.67% in early March to 3.90% by the end of April. Similarly, underlying inflation (excluding volatile items like energy and agricultural goods) has increased from 3.56% to 3.96% in April.
The most notable recent increase is in the goods’ price index, which has risen from 2.47% in December 2024 to 3.38% by April. Notable price hikes in April include detergents, skincare products, hair care items, and automobiles.
These increases are likely due to the current context. Since January, the Mexican government has imposed an import tax on products from countries without a trade agreement, such as China. This tax affects digital platforms like Shein and Temu, as well as textile products sold by large retailers.
In Mexico, unlike developed countries, there are numerous markets where businesses can adjust volumes or increase prices due to limited competition. In a trade-beligerent situation and low demand (as indicated by reduced employment and consumption in Q1), price adjustments among businesses are plausible.
The Federal Commission of Competition (Cofece) still exists but lacks power and will be replaced by the proposed National Antimonopoly Commission once Congress approves the initiative. Banxico’s governing board correctly points out that the risk balance remains upward-biased.
If the goods’ inflation rate continues to rise at its current average quinquennial rate of 0.28%, the inflation rate could surpass 4.5% by year-end, nearing the upper limit of the monetary policy tolerance range (4.0%).
US Monetary Policy and Its Influence on Banxico
The Federal Reserve’s (Fed) withdrawal from its trade war and subsequent cooling have boosted investor confidence, reducing recession fears in the US. Consequently, market participants now anticipate that the Fed might lower interest rates once or twice before year-end, with June reduction probability nearly vanished.
Should goods’ inflation and underlying inflation persist alongside the Fed’s reluctance to lower its interest rate, Banxico’s decision to continue reducing the rate post-July will become more challenging, making a significant drop below 8% less likely.
Key Questions and Answers
- What is Banxico’s expected interest rate decision? Banxico is likely to lower its benchmark interest rate by 50 basis points, placing it at 8.5%.
- Why are there concerns about further interest rate reductions? Recent inflation increases, particularly in goods and underlying inflation, along with the Fed’s potential reluctance to lower interest rates, pose challenges for Banxico to reduce rates significantly.
- What factors are contributing to rising inflation in Mexico? Import taxes on products from countries without trade agreements with Mexico, limited competition in certain markets, and reduced employment and consumption have led to rising inflation.
- How is US monetary policy affecting Banxico’s decision? The Fed’s cooling of its trade war and reduced recession fears have influenced market expectations, making it less likely for the Fed to lower interest rates, which in turn impacts Banxico’s rate adjustment decisions.
